Foreclosures increasing for prime loans

Rate has doubled in the past year

The mortgage crisis that has shaken the nation's economy is expanding beyond the subprime market to include borrowers with prime loans and solid credit ratings, said a survey released yesterday by the Mortgage Bankers Association.

The rate of foreclosure on prime, fixed-rate mortgages doubled in the past year, said Jay Brinkmann, chief economist for the Mortgage Bankers Association. Nearly 6 percent of such mortgages were in the foreclosure process or behind by at least one payment at the end of the first quarter.

Among all types of mortgages, the survey showed that a record 12 percent of homeowners had fallen behind on their payments or were going through foreclosure. The report reflects a significant threat to the ailing housing market as well as the overall economy, said Mark Zandi, chief economist at Moody's Economy.com.

“As long as foreclosures are rising, house prices will decline, which will undermine household wealth,” he said. “It will be very difficult for the economy to gain any traction. A lot more foreclosures are coming.”

Widespread layoffs and pay cuts have weakened the ability of many middle-wage households to make their monthly mortgage payments. The expanding mortgage market meltdown began with the failure of highly leveraged subprime loans. Such loans originally were intended for borrowers with blemished credit but fell into common usage.

Tens of thousands of loans were approved in the first half of the decade without regard to income or credit scores. Critics say lenders lowered their underwriting standards as home prices rose beyond the reach of middle-wage earners in order to prolong the housing boom.

Until recently, many analysts said the people who were losing their homes probably took on too much debt in relation to their income. The new survey reflects a deepening recession, with formerly solvent homeowners struggling to make ends meet.

University of San Diego economist Alan Gin said San Diego County's high job losses are contributing to the problem locally. The county's unemployment rate is now 9.1 percent.

Dean Baker, an economist with the Center for Economic and Policy Research in Washington, was surprised that the quarterly report showed that 7.51 percent of prime loans in California were past due. An additional 3.48 percent of prime loans, which go to borrowers with high credit ratings, were in foreclosure.

“That is incredible,” Baker said. “These are the good ones. These are not people who likely got in over their heads.”

Foreclosure activity in San Diego County has been fluctuating in recent months. In April, MDA DataQuick reported 903 foreclosures in the region, an increase of 23 percent over March but a drop of 36 percent from April 2008. There were 3,371 recorded notices of default in April, a 12 percent decline from the previous month, but a year-over-year gain of 2.2 percent.

Prime, fixed-rate loans, which go to borrowers with good credit, now represent the largest share of new foreclosures nationwide, according to the first-quarter survey.

About 56 percent of the increase in foreclosures and past-due loans is coming from California, Florida, Arizona and Nevada.

Brinkmann said the delinquency rate for mortgage loans in California was 9.22 percent at the end of the quarter, an increase less than one-tenth of 1 percent from the previous quarter.

No region of the country is immune from the foreclosure problem, as rising unemployment spreads. Zandi said efforts by the Obama Administration to place distressed borrowers in affordable loans has yet to make a dent in the problem.

Economist Christopher Thornberg of Beacon Economics in Los Angeles said the situation isn't surprising, given the large number of bad loans that were made during the housing boom.